Texas Genco: Lending at large

The $3.75 billion financing for the Texas Genco acquisition was the largest ever non-utility purchase of power assets, and an entry by financial players into the independent power business on an unprecedented scale.

The buyers – the Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts and Texas Pacific Group – are private equity funds and have invested around $900 million in equity in the deal.

The deal is in two stages: the first in the fourth quarter of last year when everything but the South Texas Project (STP) was purchased, including 19% of Texas Genco's publicly owned shares, and the second in April 2005 when the borrower acquires STP.

Texas Genco consists of 5,200MW of coal and nuclear-fired capacity, and 9,000MW of gas-fired capacity. It is all located within the Electric Reliability Council of Texas (ERCOT), and was an 81% subsidiary of CenterPoint Energy. CenterPoint owned the distribution businesses of Reliant Energy, which spun off its merchant assets as Reliant Resources – 19% of Texas Genco was distributed to CenterPoint shareholders and listed.

The sale of the company is a requirement of CenterPoint, part of the deal that Reliant made with Texas regulators in 1999 in moving forward deregulation.
Since then, Texas has been one of the most competitive markets in the US, as well as one of the easiest places to build a power plant. Much of the new gas capacity of recent years has been built in Texas, and as a result electricity prices are derived from the price of gas and the relative efficiency of the state's gas-fired fleet.

Although steeped in merchant risk, Texas Genco was put up for sale with plants that would benefit from margins much wider than those available to other gas plants. And as gas prices headed up, the lower availability levels of the coal plants became much less important, and the economic value of the gas plants dwindled.

But the buyers' financial advisers are two investment banks with some of the most advanced energy trading capabilities available, as well as solid credit ratings. And in a move that certainly facilitated the deal, J Aron, Goldman Sachs' commodity division, along with Constellation Energy and Morgan Stanley, separately signed up to power purchase agreements for much of the portfolio's output – 90 million MW hours of base-load output until 2008.

While investment banks have been prepared to provide power, as well as financial hedges, to investment grade producers and special purpose vehicles, this is the first time they have relied upon such a lowly-rated counterparty. Texas Genco has a B1/B senior unsecured rating, while its first priority debt has a Ba2/BB rating.

The overall financing involves multi-tranche bank debt comprising a bond issue, a revolving credit, a term B loan, a delayed-draw B loan and two letters of credit. The debt package goes out beyond the terms of the PPAs, to 2011 in the case of the loans, and to 2014, in the case of the notes. The deal features cash sweeps that trap almost all cash to pay down debt.

The bookrunners on Texas Genco are Citigroup, Deutsche, Goldman Sachs and Morgan Stanley. The leads, which also acted as financial advisers to the sponsors, are Goldman and Morgan Stanley.

To provide sufficient credit support the deal features a $300 million special letter of credit (LC), provided solely by Deutsche, as well as a further $200 million LC, both of which support current and future PPA contracts. The final ancillary piece of debt is a five-year $325 million working capital revolver priced at 225bp over Libor.

The original deal was to consist of a $1.375 billion term B loan with a first priority position, and a $1.375 second priority note issue. The ultimate structure consisted of $1.125 billion of senior unsecured notes, with a maturity of 2014 and a coupon of 6.875%, and $1.625 billion in Term B debt.

The term B debt consists of a $1.15 billion initial term loan, and a $475 million delayed draw term loan, both due 2011 and priced at 200bp over Libor. The delayed draw portion will be conditional upon Nuclear Regulatory Commission approval of the purchase of the South Texas Project nuclear plant.

The deal is a measure of the way the US power market continues to go and as more non-utility investors come into the business, the B loan approach looks set to find more converts in the investment banking sector.

GC Power Acquisition LLC
Status: Closed 8 December 2004
Size: $3.65 billion
Total debt: $2.84 billion
Description: 14,000MW coal, nuclear and gas portfolio
Sponsors: Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts and Texas Pacific Group
Arrangers: Citigroup; Deutsche; Morgan Stanley; Goldman Sachs
Seller advisers: Citigroup (financial) Baker Botts (legal)
TG advisers: RBC (financial) Haynes and Boone (legal)
Sponsor advisers: Goldman Sachs, Deutsche Bank and Morgan Stanley (financial), Simpson Thacher & Bartlett, Stroock & Stroock & Lavan, Vinson & Elkins (legal)